Could online ad exchanges work for news, too?

Last week, Google launched its long-expected bid to conquer the online display advertising business to complement its domination of the search ad market by unveiling the new, auction-based DoubleClick Ad Exchange, built on the ad-serving company it acquired in 2007 for $3.1 billion and has spent the two years since steering through the regulatory process. The new exchange will function a bit like a stock market, allowing web site publishers to put their display inventory up for auction, and advertisers to bid on placements in near-real time, much as they do with Google AdWords today.

The idea isn’t new. Both Yahoo and Microsoft already operate online ad exchanges. But byopening its new display ad exchange to the hundreds of thousands (millions?) of web sites that are already part of its AdSense network for  search ads Google will bring enormous new liquidity to what has been, up to now, a pretty small market. In principle, that should lead to more efficient price discovery for advertisers and higher inventory yields for publishers.

Even so, the DoubleClick Ad Exchange has a long way to go before it can dominate the online display ad business. Most online display ads are sold either directly by publishers or through proprietary ad networks–the largest of which is run by Yahoo–which syndicate ads to web sites on behalf of marketers. Only a small percentage of online display ads are currently sold through exchanges.

That could change over time, however, as exchanges become more efficient. Publishers have long complained that ad networks tend toward commodity pricing of online inventory and some larger publishers have stopped working with networks altogether, or limited the number they work with, even at the cost of leaving inventory unsold. If exchanges were to evolve into practical yield-management tools for publishers, analogous to how airlines set fares, more inventory would likely find its way onto exchanges rather than networks.

Even if exchanges were to remain a small piece of the online advertising pie, however, The Media Wonk wonders whether they couldn’t also serve as a model for new types of monetization engines for publishers. The critical problem ad-supported publishers face online is that online CPMs can never match offline CPMs, both because of the inherent fragmentation of the web and because the available inventory online is both theoretically and practically infinite, putting tremendous downward pressure on prices.

Worse for publishers, new inventory is being created all the time by aggregators who link to the publishers’ own content. While the links do drive traffic back to the original site, creating a monetization opportunity for the publisher, the aggregator’s ad inventory simultaneously dilutes the market and drives down prices.

Many publishers, of course, regard aggregators as parasites. But as I’ve argued before, the real problem they face online is not parasitism (i.e. free riding) but a lack of suitable mechanisms–especially market mechanisms–for capturing a greater share of the new value being created by aggregators around their content through network effects.

Putting everything behind a pay wall, as some publishers are now contemplating, by itself is no answer. It does nothing the alter the fundamental dynamic driving down CPMs because new ad inventory would still be infinite. It would allow publishers to extract some money directly from readers but it will also cut them off from the network effects that lead to new value creation on the Internet.

What if, on the other hand, in addition to putting their own presentation of their content behind a pay wall publishers also made their content available to aggregators through some sort of marketplace, with prices set according to how many views of a particular piece of content an aggregator serves up?

Such direct monetization of content has long been anathema to traditional news organizations because it was presumed the monetization would come from advertisers: buy ad, get edit. (Not that newspapers haven’t been doing it for decades anyway, albeit indirectly. How many of those soft-news sections of your daily paper on travel, “living,” or style would exist but for the ads they contain?)

But an open marketplace for content would, in principle, be no different from syndication. Just more efficient, and more suited to distributing content on the web because it would enable customized, a la carte aggregations rather than simply all-or-nothing feeds. The aggregator would then be free to monetize its own presentation of the content however it saw fit, including making it free to the user, while the publisher would share in the value its content helped to create.

Why would an aggregator (or blogger) pay for content when it can simply be linked to? It’s not clear that they would. But I can think of a few incentives such a system would offer them:

• They could presumably reproduce the full text of stories so they wouldn’t have to send readers to another URL, whence they might not return; 
• Linking to something that’s behind a pay wall is terribly useful for the reader.

I can also think of a million reasons why they wouldn’t, and why such a system wouldn’t work. My point is that publishers (and all content owners for that matter) need something more than a way to force people to pay for content. In fact, it’s not at all clear that in the long run that wouldn’t end up destroying more value than it created. What content owners need are better mechanisms for capturing value as it gets created on the web. And the way value is created on the web is through use, not simply access.

What intrigues me about a marketplace along the lines of an ad exchange is that it could operates at the right layer of the value chain for exchanging value between content creators and content users. For all the hype, investment and effort put into consumer-facing online applications by content owners, very little attention has been paid to the potential of  business-to-business applications to serve as a mechanism for capturing value online.

What publishers need are better mechanisms for capturing value created by the use of their content online, even–perhaps especially–when that use is made by others. Denying third parties the access they need to make such use is not an answer because it leads to less value creation.

If I were a VC, I’d be looking for entrepreneurs who were focused on building tools to let businesses exchange value as it gets created, even if no consumer ever sees the application. Not sexy, maybe. But definitely needed.